Achieving Operational Excellence in Mortgage Lending

by Tom Hughes

Dad, why does it take six weeks to close a home loan? My son asked this question after a visit to a local bank. “I just don’t understand,” he continued to state in frustration, “I have 30 percent down, my credit
score is over 800, and I have more in savings than the loan amount requested. I borrowed my farm
production loan for three times as much as the loan requested and it only took 30 minutes!” Having managed a mortgage operation that guaranteed 15- day closings, I know six weeks is too long, even post-TRID. Unfortunately, the six-week estimate by the local community bank is close to the current national average of 46 days.

WHY DOES IT TAKE SO LONG?

While there are varying answers to this question, lenders often give the following reasons for delayed loan closings:

The Burden of Regulatory Compliance. Granted, the TRID rule specifies time frames for disclosures and the CFPB’s QM or “ability-to-repay” rule requires companies to verify and document the borrower’s ability to repay the loan; however, we cannot blame regulation as a major culprit for the time it takes to close a mortgage loan. The mortgage lending industry has dealt with compliance issues for years.
Volume. Low interest rates mean more applications straining the capacity of a lender’s processing and underwriting functions. Unfortunately, in many operations, as volume increases, service decreases.
Standards Required for Securitization. Mortgage loans must meet high standards to become investment quality for securitization. It is the underwriter’s responsibility to assure the quality of the loan. In order to do this, the paperwork relating to the loan, the borrower, and the property go through several screening processes. The lack of documentation or missing documentation greatly slows down the process.
Appraisal & Title Exam. The time it takes for these two services to be completed is often cited as factors in time to close. Appraisers and title companies often have trouble keeping up with demand. Providing good, complete information and documentation to each service provider can speed delivery.

HOW DO WE SPEED UP THE PROCESS?

As participants in the mortgage industry, we should be customer focused, which means re-engineering the process to reduce turn times.

Often borrowers are disgruntled or confused by the whole application-to-closing process. We can
make the process easier, faster, and less stressful for our customers. Improvement begins with clearly
understanding your application process and current workflow, setting objectives, measuring your current performance by using Key Performance Indicators (KPIs), and utilizing a system to ensure quality of the initial loan application.

Stage 1. The success of the mortgage loan process starts with the MLO and a well-documented, complete application. A poor application that passes to the processing state will cause problems that not only affect the loan but cause delays in the entire loan pipeline. In order to avoid this, the MLO needs to be trained on lender requirements and be held accountable for the quality of applications submitted. When offering 15-day guaranteed closings back in the day, our operation implemented an MLO Scorecard with hard stops
for applications that did not meet the quality standard. The MLO Scorecard was the first measurement and one of the most important steps in achieving a successful operation. If you measure it, expect improvement!

Stage 2. A well-trained, efficient processor is also key to getting a loan closed in a timely manner. It is this individual that must gather missing information for submission to the underwriter and then chases missing or unsatisfactory documentation from applicable sources once the loan has been underwritten. Like the other functions of the process, measurement of performance will give management insight into
the quality and speed of the individual. Processor productivity can be measured by the following
KPIs:

Completeness of mortgage loan package submitted to underwriting (number of files with conditions)
Turn time by processor (time file received to submission to underwriting)
Number of files processed per month
Mortgage application approval rate

Stage 3. Underwriting is tasked with the responsibility of reviewing a file and determining investment quality. Complete file documentation must be reviewed to determine the risk in the application and determine if it meets investor guidelines. As with a processor, there are indicators to a successful underwriter. An underwriter can be measured by using the following KPIs:

Defaults on repurchases for individuals
Turn time by underwriter (time file is received to posting of decision status)
Number of files underwritten per month
Findings in QC review

State 4. A closer assembles, prepares, and reviews critical closing documents for a loan once it has been approved for underwriting to close. A detail-oriented, well organized individual will act as a point of contact between parties involved in the loan transaction, coordinate closing, and ensure compliance. As with the other functions, a closer can be measured by using the following KPIs:

Number of files closed per month
Turn time by closer (time file received to closing package)
Findings in QC review

We cannot overlook the importance of technology in this process of faster-close, higher quality loans. The mastery of technology is the key to a highly productive, efficient, and profitable mortgage operation. You must have it and know how to use it! Current and future adaptation of Artificial Intelligence (AI) technology is rapidly changing the mortgage industry. It affects how we currently do business and how we will do business tomorrow. It is and will continue to be a huge factor in the reduction of application-to-closing turn times.

The solution to faster mortgage closings involves the knowledge and implementation of the following:

A clear, understandable workflow describing an efficient loan manufacturing process
Well-defined, measurable objectives for process improvement
Complete, fully documented loan application with MLO accountability
Measurement and quality checks during the process to indicate areas needing improvement (not waiting for QC after the loan closes)
Staff education and set expectations
Outsource processing and/or underwriting in times of excess volume
Adaptation and openness to the future of technology
The Big One – strive for perfection and when you think you have achieved it, improve it!

Tom is a Managing Partner of Bankers Mortgage Consulting, LLC and serves as CEO of Mortgage Insource Services, LLC. He can be contacted via email at thughes@bankersmortgageconsulting.com or by phone at 270-590-9116.